Dr. Esin Cakan of the College of Business presented her paper titled, "The impact of US macroeconomic news on emerging financial markets," to students and faculty members Sept. 19. The paper discusses her work on the impact of the U.S. macroeconomic policy decisions on emerging financial markets.
Below find an excerpt from Dr. Cakan's paper:
Last week’s FED QE3 announcement about increasing longer-term securities with open-ended purchases of $85 billion per month to boost growth and keep federal funds rate near zero has caused a big increase in most of the world’s stock markets. It also gives us courage to share the results from our latest study. Not only by one single day, but also using historical data set, our study finds that US news has big influence on the worldwide financial markets.
Emerging market countries have almost 50% shares of world GDP in 2011, which they doubled less than two decades, contributing to a significant rise in savings and, hence, in the supply of loanable funds. Moreover, since deregulation of the financial industry in most Asian countries in recent years, stock prices and capital movements are sensitive to news, return differentials, technological innovations, changes in business conditions, and political events in domestic market as well as in external sources. Therefore, the volatile behavior of asset returns interacts dynamically with shocks in the rest of world is inevitable.
We analyze the effect of US macroeconomic news on daily stock market return and volatility in twelve emerging markets for the period 1994 to 2010. We use GARCH and asymmetric GARCH specifications to model the volatility. Our findings show that returns and volatility of emerging financial markets are strongly influenced by the US news.
- 8 emerging financial markets out of 12 are influenced positively by the FED announcements. The market returns increase significantly with the FED policy news. Besides, FED announcements make 3 emerging financial markets, namely Singapore, Taiwan and Turkey, more risky.
- US unemployment news announcement increases the market risk, or volatility, significantly 6 emerging markets, namely India, Mexico, Phillipines, Russia, Singapore and Turkey.
- US inflation news announcements affects Turkish stock market return and volatility.
- We can conclude that US has a still big impact on the world economy, especially with the emerging markets that has high trade relationships.
- Considering bad and good news effect on the emerging markets volatility, we found that bad news increases volatility more than good news in emerging markets, which is consistent with the earlier literature for the developed financial markets.
Our results are crucial for building accurate asset pricing models and forecast of stock market volatility.
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